With good sense, the North Sea is still a major asset for Britain

The UK should count itself very lucky. Not only has its endowment of oil and gas ensured security of energy supply for decades, the industry currently provides employment for almost half a million people. Since exploration began on the UK continental shelf (UKCS), a total of £370bn has been injected into the economy to find and develop oil and gas reserves, and the Treasury has collected another £230bn in tax from the industry over the same period, which will be largely reinvested.

An innovative, world-class supply chain now worth £15bn a year has evolved, learning its ‘abc’ on the UKCS, and today its technology and expertise is increasingly being transferred around the world, benefiting the UK’s balance of trade.

The vital contribution made by the UK’s oil and gas industry is plain for all to see. In addition to giving that contribution due recognition, what is important now is securing the right business environment to sustain success at home, whilst allowing continued growth in overseas markets.

Time is of the essence. The UK North Sea is maturing, and we are starting to hear the creaks that have so far been masked by high oil prices.

A recent survey of the industry found that the £2bn increase in expenditure in 2006 was due to cost inflation rather than increased activity. Activity actually decreased during  that time, as can be seen in the reduction in drilling and projects brought into production. The sustained high oil price has increased demand for resources globally, resulting in rising costs which put particular pressure on the economics of a mature basin.

The average cost of producing a single barrel of oil or gas equivalent (boe) rose by 45% in 2006 to $22/boe and is expected to rise further to an average of $25/boe for projects starting between 2007 and 2009. When just under half of the UK’s daily production is not oil but gas, which has been selling in the first six months of 2007 for an equivalent of just over $20 per barrel, these rising average costs compromise competitiveness, especially when the signs indicate that gas prices could be sustained around that level for some while yet.

What is more, in 2006 a new development was brought into production on average once every five weeks, but this was not enough to offset the decline in existing fields, from which production becomes technically more difficult and expensive as time goes on. Despite healthy levels of exploration, the size of discoveries made over the last ten years has on average fallen to a tenth of the those made over the first ten years of exploration activity on the UKCS.

The reality of operating in a mature basin is causing the UKCS to creak; it is struggling to compete for investment on the global stage. The only way to overcome the challenges of this reality is to make other aspects of the business environment, like the tax and regulatory regime, more attractive. This is achievable through deeper engagement and understanding between industry and government.

The industry has taken an important step in that direction in the formation of Oil & Gas UK, an organisation with a powerful new voice, uniting operators and contractors in a common purpose: to take forward the case for a safe, sustainable and profitable future for the industry.

Oil & Gas UK is actively engaging with the government to remove barriers to new investment, in particular through fiscal and regulatory reform. If the competitiveness of the UKCS is to be restored, there is an urgent need to reduce the tax burden on new developments and to resolve uncertainty around the taxation of older fields.

Another area of concern is regulation around decommissioning activities. If new players are to be encouraged to invest in the UKCS, asset trading needs to be less costly and protracted. The industry needs the government to permit securitisation on a post-tax basis and provide certainty on the availability of decommissioning tax relief.

The Petroleum Act 1998 must also be amended to provide a clean break when assets are sold, with an appropriate agreement in place to provide robust financial security for all parties.

Oil & Gas UK values the constructive dialogue with government and looks forward to the outcome of the current fiscal discussions and consultation on decommissioning. The industry has set the scene for real change by uniting in a new organisation, enabling a clear and consistent message to be presented to the government.

It is now time for the next stage — the regulatory and fiscal reform that will ensure the UK continues to benefit from its oil and gas industry.

Malcolm Webb  is Chief Executive of Oil & Gas UK.